State Street to Cut 850 More Jobs After Custody Bank’s Expenses Climb 20%

Date: Thursday, July 21, 2011
Author: Christopher Condon, Bloomberg

State Street Corp. (STT), the third- largest custody bank, will cut an additional 850 jobs over the next 20 months after reporting earnings that missed analysts’ estimates because of rising expenses.

The cuts are on top of 1,400 reductions announced last year and scheduled to be completed by the end of this year. Costs on an operating basis increased 20 percent in the second quarter from a year earlier, driven by a 22 percent gain in salaries and employee benefits, the Boston-based bank said today.

“It seems expenses were higher than many people expected,” Kenneth Usdin, a senior analyst for Jefferies & Co. in New York, said during a conference call with company executives.

Chief Executive Officer Joseph “Jay” Hooley is cutting spending in an attempt to offset the impact of record low interest rates, which reduce the return the bank earns on investments and on lending to institutional investors. Robert Kelly, head of rival Bank of New York Mellon Corp. (BK), said today he plans to reduce costs after non-interest expenses in the second quarter rose 22 percent from a year earlier.

Shares Fall

State Street’s second-quarter net income on an operating basis rose 5.2 percent to $483 million, or 96 cents a share, from $459 million, or 93 cents, a year earlier. Excluding certain items, 20 analysts surveyed by Bloomberg estimated average earnings of 97 cents a share.

State Street fell 93 cents, or 2.2 percent, to $42.02 at 4:15 p.m. in New York Stock Exchange composite trading.

BNY Mellon, the largest custody bank, said net income rose 12 percent to $735 million, or 59 cents a share, from $658 million, or 54 cents, a year earlier. Its shares rose 9 cents, or 0.4 percent, to $24.73.

Under the job reductions announced today, the company will eliminate 530 information technology employees and transfer 320 to jobs at outside vendors. Hooley said the cost-cutting measures under way since November will outpace new expenses in the second half of this year.

‘Up-Front’ Expenses

“In a transition like this you have to invest up-front in order to drive the benefits in subsequent periods,” he said in a telephone interview.

State Street’s assets under custody rose 20 percent from a year earlier to $16.8 trillion after the Standard & Poor’s 500 Index leapt 28 percent in the year ended June 30. The money State Street manages for investors increased 15 percent to $2.12 trillion. Assets under management were little changed from the previous quarter after the S&P 500 declined 0.39 percent in the three months ended June 30.

Assets were boosted from a year earlier by State Street’s acquisition of Bank of Ireland’s investment-management business in January. The purchase brought about 57.5 billion euros ($81.44 billion) in investment assets.

Revenue from fees increased 12 percent to $1.89 billion, driven by a 16 percent climb in servicing fees. Trading fees, which include foreign-exchange trading revenue, declined 5 percent to $311 million.

European Debt Crisis

State Street’s operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income. The bank reported discount accretion of $51 million, or 6 cents a share, in the quarter. Including those earnings, net income rose to $502 million from $427 million from a year earlier.

Hooley said the ongoing debt crisis in Europe hadn’t affected revenue from clients based there and may help create acquisition opportunities as European banks consider whether they need to build capital. Since becoming CEO in March 2010, Hooley has targeted custody operations in Europe for possible takeover.

“I believe we will see opportunities attractive to us out of the European debt crisis,” he said.

State Street has been a target of union-organized protests in Boston in recent months over job cuts. About 400 of the 1,400 job cuts announced last year will come in Massachusetts.

‘Committed to Massachusetts’

Carolyn Cichon, a spokeswoman for State Street, said the company had increased its headcount in Massachusetts over the past five years by 24 percent and in Boston by almost 40 percent.

“State Street remains committed to Massachusetts,” Cichon said in a telephone interview.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.

State Street last month signed a new three-year custody deal with the $232 billion California Public Employees’ Retirement System, the largest U.S. public pension fund. The decision signaled that a series of lawsuits from public pension funds against State Street and BNY Mellon will do little damage to the custody banks’ ability to retain the funds’ business, analysts including ISI Group Inc.’s Brian Bedell said.

“To me it was a great litmus test,” Hooley said.

The suits from at least five states, including California, allege that the banks defrauded public pension funds by overcharging on foreign-exchange transactions. The banks have denied the accusations and said they will defend against the suits.

BNY Mellon and JPMorgan Chase & Co. (JPM), both based in New York, are the two biggest custody banks.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net